A contractor's annual overhead is $480,000 and they typically complete $3,200,000 in work annually. For a $150,000 project, what overhead amount should be allocated?
Correct Answer
A) $22,500
Overhead rate = $480,000 ÷ $3,200,000 = 15%. Project overhead allocation = $150,000 × 15% = $22,500.
Why This Is the Correct Answer
Option B is correct because overhead allocation uses a percentage-based method. First, calculate the overhead rate: $480,000 ÷ $3,200,000 = 0.15 or 15%. Then apply this rate to the project value: $150,000 × 15% = $22,500. This proportional allocation ensures overhead costs are distributed fairly across all projects based on their relative size to total annual work volume.
Why the Other Options Are Wrong
Option B: $28,800
$25,200 represents a 16.8% overhead rate, which overestimates the actual overhead percentage. This error likely comes from miscalculating the overhead rate or applying an incorrect percentage to the project value, resulting in over-recovery of overhead costs.
Option D: $25,200
$28,800 represents a 19.2% overhead rate, significantly higher than the actual 15%. This substantial overestimate would lead to overpricing and potential loss of competitiveness while unnecessarily inflating project costs beyond what's needed for overhead recovery.
Memory Technique
Remember 'RATE then ALLOCATE': First calculate the overhead RATE (annual overhead ÷ annual volume), then ALLOCATE to the project (project value × rate). Like spreading butter - the thickness (rate) stays consistent across all slices (projects).
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A contractor's annual overhead is $480,000. If the company completes $3,200,000 in work annually, what overhead percentage should be applied to a $150,000 project?
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